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If you're in the market for a home, it's important to have a realistic sense of how much you can afford to spend. Money expert Dave Ramsey has long argued that your monthly home payment — which includes all house-related expenses and not just your mortgage payment — shouldn't exceed more than 25% of your take-home pay. But not all experts agree with this rule of thumb.
Jason Finn, vice president of mortgage lending at Key Mortgage Services, believes that, given today’s home prices and interest rates, capping costs at 25% of take-home pay is no longer realistic. Here's why he's pushing back against Ramsey's advice.
Find Out: How Much House Can You Really Afford? The Answer May Shock You
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Fixed Mortgage Rules Don't Work for Every Buyer
In my two decades in real estate — first as a broker and now as a mortgage loan originator — I’ve seen financial trends come and go. One persistent talking point is the idea that you should never spend more than 25% of your take-home pay on your mortgage.
My biggest concern with this rule is its reliance on absolutes. Personal finance and homeownership are rarely one-size-fits-all, and a rigid percentage doesn’t reflect a buyer’s unique lifestyle, priorities or today’s economic reality.
The 25% Mortgage Rule Often Doesn’t Match Today’s Housing Costs
For many buyers today, especially first-time buyers, hitting that 25% benchmark simply isn’t feasible. In some cases, it can even prevent financially stable individuals from entering the market.
Instead of focusing on a fixed percentage, buyers should think about how their housing costs align with their overall lifestyle and financial goals.
Housing Affordability Is a Range — Not One Magic Percentage
There’s confusion around how these rules are calculated. In lending, we look at debt-to-income ratios based on gross income — not take-home pay — and we consider total housing costs, including principal, interest, taxes, insurance and any HOA dues.
Depending on someone’s priorities, a reasonable range for housing costs could vary widely — from around 20% of gross income to 35% or more for buyers who prioritize their home and have minimal other debt.
Avoiding PMI at All Costs Can Hurt First-Time Buyers
Waiting to save 20% [for a down payment] to avoid private mortgage insurance (PMI) isn’t always the best strategy. Many buyers spend years renting and miss out on appreciation, only to find themselves priced out.
In reality, PMI is often a relatively small cost compared to the long-term financial benefits of owning.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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